10 biggest Microsoft stories of 2009

2009 was a year of ups and downs for Microsoft – like just about every year recently. It had two big product launches, Bing and Windows 7, and finally reached a search deal with Yahoo. But the company also was marred by legal issues and big layoffs, and its status in the smartphone market continued slipping.

Here, in no particular order, are the 10 biggest stories of 2009 in the Microsoft ecosystem.

1) Windows 7 debuts

Desperate to move past the public-relations disaster that was Windows Vista, Microsoft released Windows 7 in October to positive reviews. Largely a mere polishing-up of Vista, Windows 7 is expected to catch on in the enterprise market – especially since Windows XP support is due to expire in 2014.

The Oct. 22 launch was more subdued than the gaudy, overzealous launch of Vista two years earlier – Microsoft had learned its lesson. This time around, the ecosystem – namely peripherals manufacturers – was ready for Windows 7. So were the Microsoft fanboys. And so was Burger King.

A year ago, if you’d asked the average person whether they knew Microsoft had a search engine, they most likely would’ve said no. Compared to Google, and even Yahoo, Live Search ended up a dud. So what did Microsoft do? It gave Live Search a big facelift and rebranded it Bing.

Bing – it rolls easily off the tongue, kinda like Google. But it’s not easy breaking back into a market where the dominant player’s name has become a verb. Since its official launch in June, Bing has seen its U.S. market share steadily climb, passing the 10 percent mark in November. Meanwhile, Yahoo’s share plummeted.

It took Microsoft CEO Steve Ballmer more than two years, but he finally hooked up his company with search giant Yahoo. And he didn’t have to pay billions for a flat-out acquisition. With their revenue-sharing deal, Microsoft and Yahoo can join forces to attack market-dominating Google. But would it work?

The partnership still must clear U.S. and European antitrust review. If it does, Yahoo’s Web search will be powered by Bing and the Internet company will keep most of its ad revenue. Meanwhile this year, Yahoo’s U.S. search-engine market share dropped from 21 percent in January to 17.5 percent in November, according to comScore.

Once upon a time, Microsoft had bragging rights for one-fifth of the smartphone market. Its mobile operating system, Windows Mobile, was one of the first widely adopted platforms. But by the third quarter of 2009, WinMo’s share had slipped to 8 percent. Meanwhile Apple, Palm, Research in Motion, Nokia, Google – basically everyone else – kept improving their mobile OSes, vying to be the dominant player.

Ballmer said it best himself when Microsoft released the luke-warm Windows Mobile 6.5 in September: “This will not happen again.” He was referring to the delays in releasing Windows Mobile 7, for which a launch date still has not been announced. WinMo 6.5 was largely a holdover until the next version, which Ballmer said he wished Microsoft was able to release this year.

For more than a decade, Microsoft was under fire for its practice of bundling Internet Explorer with Windows. The antitrust cops were all over it: The inclusion of Microsoft’s Web browser on Microsoft’s operating system was too anti-competitive, regulators said. In the U.S., Microsoft avoided being split into two companies and ended up with what mostly amounted to a slap on the wrist.

In 2009, the European Union’s Competition Commission took on the software superpower as its antitrust case came to a head. Aiming for a settlement, Microsoft offered to silence competitors’ complaints by removing IE from Windows 7 altogether – but the EU had a different idea. Microsoft caved to pressure and created a “ballot screen” via which European users can choose their preferred browser from a list. After a change of heart in October, the EU accepted Microsoft’s proposal in December.

In January, Microsoft announced that it would be laying off 5,000 employees over 18 months in the company’s first-ever round of mass cutbacks. The cuts would come in research and development, marketing, sales, finance, legal, human resources and IT. At the same time, Microsoft said then, it would continue hiring in other areas, keeping the company’s net headcount loss between 2,000 and 3,000.

As it turned out, Microsoft completed the layoffs by November – but it also cut more people than expected. By the time the Redmond-based company laid off the last 800, the total had hit 5,800. Microsoft’s employee headcount was about 96,000 in January; by December it was about 91,000. The cutbacks sent a clear message that even Microsoft, which had proven itself resilient during prior economic slowdowns, couldn’t just march through the current recession.

Though the lawsuit was filed in 2007, the hubbub started in August when a judge slapped Microsoft with an injunction that said it could no longer sell Word. i4i Inc. had sued Microsoft for patent infringement, alleging the ubiquitous word-processor incorporated custom-XML technology owned by the small Canadian company. A Texas jury agreed that Microsoft was liable for willful infringement and awarded i4i $200 million in damages.

Microsoft, determined to prove i4i’s patent invalid, was granted an appeal and a temporary stay on the injunction. In September, the companies fought over the case in a Washington, D.C., federal appeals court – Microsoft arguing that i4i was out for easy money, and i4i arguing that Microsoft killed its business model. Just days before Christmas, a three-judge panel upheld the Texas ruling, reinstating the injunction and imposing $290 million in damages after fees and interest. Microsoft has until Jan. 11 to strip the custom-XML editor from Word – or stop selling Word altogether.

OK, so Google isn’t Microsoft. Why is this story on this list? Because Google’s upcoming Chrome OS – a marriage of Web browser and operating system – has the potential to change computing as we know it and threaten Microsoft’s biggest cash cow: Windows. The idea is that these days, and in the future, so many tasks can be done on the Internet, why do we need an underlying operating system?

By incorporating basic OS functions – such as file browsing and peripherals support – into its Chrome browser, Google wants to do away with the need for Windows or Linux or Mac OS X. And get people using all of its cloud applications like Gmail and Google Apps. Of course, a browser-OS couldn’t entirely supplant the traditional operating system – you need more power to, for instance, edit a professional-grade video. That’s why Google initially is grooming Chrome OS for use on netbooks.

There’s no other way to put this: Project Natal looks awesome. Initially seen as Microsoft’s answer to the Nintendo Wii, and since considered so much more, Natal is an add-on for Xbox 360 that lets gamers play without using controllers. Their bodies are the controllers. And when Microsoft unveiled the project in June at the Electronic Entertainment Expo in Los Angeles, it stole the show.

There’s no official launch date, but Natal is expected to hit shelves in late 2010 or early 2011. The technology, essentially a set of cameras and sensors that pick up a gamer’s movement, will work with existing Xbox 360s and extend the popular video-game console’s lifespan. Since June, Microsoft executives have said the technology also will be applied to computers, potentially revolutionizing the concept of “user interface.”

Microsoft unveiled Windows Azure at PDC08 and announced its commercial availability at PDC09. But what the heck is it? An operating system in the cloud, that exists nowhere and everywhere? And why the heck do we need it? The answer to all those questions is simple: the future.

Microsoft won’t start charging for the Azure Platform until February, but it’s already got hundreds of developers using the service. With Windows Azure, companies and individuals can create and manage cloud-based applications that people access via the Web. It lets clients scale up and scale back their server use as needed, and can slash a company’s IT costs.

But most industry experts feel Microsoft is behind in the cloud-computing game. And the company’s cloud reputation took a few hits during 2009. In October, a server failure at Microsoft subsidiary Danger knocked out data service and access to millions of T-mobile Sidekick smartphone users. And later that month, the Los Angeles city government opted to replace its old communications system with Google Apps instead of Microsoft products.